Chapter 8: When Things Go Wrong

Kristy Levin is turning 30 this year. She is married with a one year-old daughter and is a stay-at-home mom. But all is not well in the Levin household. As a result of a lot of credit card debt accumulated by Kristy when she was in college, she is still struggling to pay off her cards. Because she is now out of the workforce, Kristy’s husband is finding it difficult to cope single-handedly with the household expenses as well as her minimum debt payments. Kristy is terrified that she has no other option than to file for bankruptcy, but, the consequences of doing so are still stressful to her. She worries about her child’s future and whether she can really start from scratch again to get her life back on track.

Like many others in similar situations, Kristy finds it is easy to be complacent about increasing debt until it is too late. Soon, even stretching your monthly income to its limit barely covers your expenses or supports your existing standard of living. The solution is to pay attention to warning signs before a crisis develops. These are the steps that can be taken to remedy the situation. Read on to find out what the signs of financial distress are and what options you have to get your financial life back on track.

Signs of Financial Distress

To say that credit and debt issues are a large problem in today’s society would be an understatement. With the rising cost of everything from houses, cars, and education, to food, utilities and gas, it is no wonder that things spiral out of control for many individuals and families. There can come a time when it becomes impossible to maintain your lifestyle and you are faced with a limited number of options. These options range from severely restricting your expenses and changing your spending habits, to opting for a debt settlement or debt management plan, or as a last resort, to declaring bankruptcy. Before you are forced to make such a big decision, it is important to pay attention to the warning signs that give you an indication that all is not well and that you might be heading towards a financial crisis. These warning signs include:

  • Belief that it will go away – One of the factors leading to a financial meltdown is when you mistakenly believe that ignoring a problem means that it will disappear. There are many reasons that lead one to believe this. It could be a fear of telling your partner the truth about your money problems because of the fear of looking bad or even jeopardizing the relationship as a result. For some, it might just be a denial that there is a problem or an inability to curb their spending habits. For these people, budgeting has never been a priority. Whatever the reason, hiding the bills and ignoring the calls from your creditors are never a good idea. The problem will not go away on its own or without work and sacrifice on your part.
  • Recurring feelings of anxiety or sleep disturbances – Waking up in the middle of the night or losing sleep because you are worried about your financial situation is another sure sign that things are going wrong. Stress is a common contributor to anxiety or difficulty sleeping. Worrying constantly about money is indicative that you may need professional help to see you through the tough times and guide you towards a more secure future.
  • Credit card overload – Using a credit card is never the issue. It’s how and when you use it that can cause problems to occur. If you find yourself paying for your groceries and daily expenses with your card, if you can barely make the minimum monthly amounts, if your monthly income just about meets your monthly debt amount, if you max out on your credit card limit every month, or if you find yourself using your card like cash, you have a problem. Using one credit card to pay for another or having your cards frozen are glaring signs that things are going downhill financially and that you need help immediately.
  • Needing more cash – You find yourself borrowing from friends and family regularly. You start looking for a second job or taking on more overtime at work to make ends meet. You request cash advances from your employer on a regular basis. These are all signs that you may be heading for a money management crisis.
  • No insurance – You do not have the spare cash to pay for your health insurance or life insurance. Thinking and hoping that you won’t get sick and require medical treatment is foolhardy and a single medical emergency or illness could tip you or your family into financial despair.
  • Loan problems – If you are behind on mortgage payments, education loans or car loans, things could be getting out of hand. Don’t give in to the temptation to use your home equity line of credit to make purchases or take out a second mortgage when you can ill afford one. Defaulting on your monthly payments for even as little as three months could lead to foreclosure or repossession.
  • No savings – If you live from paycheck to paycheck and have no savings or emergency funds, it might be time to rethink your budget. Even if you can only save a small amount every month – do it. It will prove to be useful one day. There are a number of unplanned situations that could crop up and leave you struggling to make ends meet. A nest egg or emergency fund could help tide you over in tough times.

If one or all of the situations above apply to you, it might be time to get professional help as soon as possible. There are other options besides bankruptcy and a credit counselor would be the best person to guide you to the correct solution for your individual situation.

These warning signs should be regarded as a means to prevent a deeper slide into financial despair. The best person to spot these signs of financial distress is YOU, so don’t ignore your problems and DO get professional help before it’s too late.

Warning Signs of Financial Distress

  • Using your credit card to pay for day-to-day expenses, paying off one credit card with another, or making only the minimum monthly payments
  • Not having any life or health insurance
  • Opting for a second mortgage
  • Being forced to borrow from family or friends or taking an advance on your salary
  • Taking a second job or working overtime to meet your expenses
  • Avoiding phone calls and mail in fear of your creditors
  • No emergency fund or savings
  • Your checks have bounced or the overdraft facility in your bank has been withdrawn
  • Lying to your family about your problem, hiding bills or refusing to talk to anyone about your financial situation
  • Receiving final notice on your utility bills
  • Receiving a Notice of Foreclosure on your home or car

How To Get Back on Track

If you have identified with one or more of the above danger signs, it is time to make a change starting now. Financial stability is not an easy goal to achieve. It takes time, effort and determination, but it can be done. Here are some suggestions to help you get back on track:

  • Budget. Budget. Budget – This is the best step you can take when planning to overhaul your spending habits. First, figure out exactly where you are spending your money and on what. Keep track of your expenses over a period of a few weeks or months and list everything – from your groceries to your monthly mortgage payments. Then, add up all your sources of income and savings. This will give you a clear picture of your financial situation and where changes need to be made.
  • Make a plan – After an honest assessment of your finances, calculate the difference between your income and your expenses. Now comes the time to plan your spending down to the last penny. There is nothing too small that can be ignored in your plan since everything adds up over time. You will be surprised at how much you can save with small changes such as cutting out purchasing your daily cup of coffee. Reduce and remove any items that are not essential and plan towards making your monthly payments for mortgage, insurance, credit card bills and utilities on time.
  • Always be prepared – A failure to stick to your budget most likely occurs when you are unprepared for a situation. For example, if you haven’t planned and shopped for groceries for the week ahead, you are more likely to splurge on eating out. In much the same way, you can save a lot if you prepare your shopping list in advance and stick to buying items on sale and in bulk when doing your weekly shopping. Without a list, there is a tendency to overspend and get carried away.
  • Learn to cut corners – Before making that purchase, always ask yourself, “Do I really need it?” Cut out extras you can live without. For example, satellite TV may be cheaper than cable or maybe it isn’t necessary to have a cell phone and a land line. Check your plans with your telephone and mobile service and shop around for those that offer the most savings. Cut down on utilities such as electricity. Don’t leave your TV, lights, and computer on when they are not in use. There are many ways that you can make small changes that add up to large savings.
  • Pay yourself – Make a habit of saving. Even a little amount at a time can help you build up your emergency fund for the future or assist you in case of any unplanned emergency. Put aside a fixed amount every month, which cannot be touched for regular expenses.
  • Get professional help – Educate yourself on different ways to invest your hard earned money and savings and get professional help to make informed choices. This will ensure that your money is being put to good use and being invested with your long term financial goals in mind.
  • Keep good records – While it is important to draw out a detailed plan, nothing will work in the long run unless you carefully monitor your progress. Maintain a spending diary, keep a record of all your bills and bank statements, and be aware of any slip-ups, to avoid the same mistakes in the future. Monitoring your expenses also works towards building your confidence in being successful and boosting your morale when the going gets tough.
  • Start building your retirement fund – The earlier you start saving for your retirement, the faster your account will grow. The easiest way to do this is through your employer’s 401(k) fund or other similar vehicles. This may also work as an effective tax break that adds to your savings in the future.

More Money Saving Ideas

  • Save gas by planning the day in advance and consolidating errands.
  • Buy groceries in bulk or try generic brands.
  • Buy generic drugs if possible and check for discounts if ordering by mail or for multiple months.
  • Make all your high interest credit card payments first.
  • Regularly balance your bank accounts to avoid over draft charges.
  • Use in-network ATMs to avoid unnecessary bank charges.
  • Quit smoking.
  • Buy energy-efficient appliances and weather-proof your home.
  • Do not buy books and movies. Check out a local library and rent them.

Ultimately all of us hope for financial stability. Budgeting, monitoring, planning, saving – they all help you realize your end goal, to be financially independent and stable. The road to getting back on track may be fraught with hardships and sacrifices, but it also represents the possibility of security, freedom and confidence.

What Options Are Available To Me If I Need Help?


If you believe that you are being honest with yourself and are aware of all aspects of your financial situation (the good and the bad), self-administration could be a solution to your money management woes. It may take months or even years of commitment, sacrifice, determination, and hard work, but it is possible. Just remember, like everything else in life, there is no quick fix with regards to money matters. You could start with the following:

  • Take responsibility – You may have made mistakes or bad choices with your finances, but you can’t change the past. Accept your present situation and move on. Wasting more time or ignoring the warning signs will only make things worse.
  • Try everything – Think of all the options you have to create more cash. Work overtime, look for a second job, and cut corners where you can. This is not the time to be choosy; searching for that “ideal” job is not imperative. It is more critical to increase your cash flow.
  • Make a plan – List out all your debts and weigh them against your income. Create a systematic plan for paying them off within a time frame that you can manage. One strategy is to take the smallest bill and pay it off first. Then, apply the amount you were paying on that account to the next smallest bill while continuing to pay on the others. The effect becomes a “snowball” as you roll each payment that ends into the next bill.
  • Stick to a budget – Budgeting will help you plan for the future. By taking a long hard look at your income versus your expenses, you can decide to cut your expenses further or try to increase your income. The box below will give you an example of recommended budget percentages that can act as a guideline with respect to your individual situation.
  • Being persistent – In your efforts to remedy your problems, do not be afraid to ask for help whether online or from a professional. It is never too late to make the necessary changes and learn how you can make things better.

Self-administration may be an effective solution to your financial problems if you are able to seriously devote your attention to the process. Without commitment and perseverance, it is too easy to slip back into accumulating more debt and creating additional crises. This is why in financial matters and money management, it often pays to seek professional help in the form of credit counseling, debt management, or debt settlement.

Debt Management

If you need to manage or reduce your existing debts, you could look into a Debt Management Plan (DMP) offered through a Credit Counseling Agency. With a DMP, you make consistent monthly payments and tackle debt such as utility and medical bills in collection status, credit card bills and other unsecured debts. A good Debt Management Program will normally include credit counseling, debt consolidation and/or debt settlement.

It all begins with a counseling session with a certified credit counselor who will take into account all your existing bills and debts and take into consideration your financial track record as well as your monthly income. You will also be educated in how to save money, to budget effectively and prevent future debt. You will then be offered the option of either debt management or debt settlement.

A DMP may reduce your monthly payments by consolidating unsecured debts into a single manageable payment that is then dispersed to your creditors. Signing up for a DMP may also result in a waiver of late and over-limit fees and a lower rate of interest (but this could vary from case to case). In this way, you can pay off your debt in a less stressful and more structured manner, and often in a shorter time frame than you would be able to achieve on your own.

Before you opt for a DMP, always check that the credit counseling agency is accredited, certified and nonprofit. Examine all the options available to you and do not get tricked by “additional” fees such as admission, application or consultation fees.

The obvious advantage of a DMP is the opportunity to get lower monthly payments and interest rates as well as a possible waiver of fees. These features can add up to considerable savings over time. For your future protection, however, you still need to pay close attention. Make sure your creditors have agreed to any changes and get everything in writing to avoid future claims. There is also no guarantee that your creditors will agree to lower your payments or waive any charges and fees.

If you do not feel confident about handling your own finances effectively, it could be a huge relief to hand things over to your credit counselor. A professional is also more likely to successfully negotiate with and convince your creditors to lower your rates and agree to any change in the repayment plan. Conversely, if you are hesitant about handing over control of your finances to a third party, this option may not be best suited for you.

A DMP, when put into practice early on and followed closely, can be an effective solution to handling all your unsecured debts and prevent bankruptcy. This will free up more money and allow you to concentrate on your secured debts such as mortgages and student loans.

Debt management is definitely not for everyone. Some might prefer to handle their own finances and some might not even be eligible for such a plan but for many, a DMP is a well-planned, structured way to get out of debt.

Debt Settlement

Debt settlement is a process where a settlement negotiator will work out an agreement for you with your creditors in order to help you pay any delinquent payments or unpaid bills. These debt settlement programs can help your significantly lessen your terms of payment. Depending on the persuasion skills of your settlement negotiator or yourself, you might be able to benefit from lower balances and a reduction in harassing calls from your creditors (once you are enrolled in a debt settlement program). Debt settlement may also be appropriate if your original creditor has charged-off your debts and sold this debt to a collection agency. And while there is no guarantee that the collector will agree to settle, larger collection agencies are normally more open to negotiation.

Debt settlement is best suited for credit card debts, though there are also programs available for other types of debt. Debt settlement programs prove the most successful for people who have a fairly good credit history and who have managed to make payments consistently in the past. If you have too many default payments on your credit history or have a low credit score, it may be more difficult for you to get accepted in to a debt settlement program.

The outcome of a debt settlement program differs from case to case. Some have reduced their debt to as much as 75 percent while others might manage only 30 percent, so don’t expect miracles. You will also need to be patient as paying off your creditors can take anywhere from two to five years.

There are several benefits to joining a debt settlement program. It will allow you to pay less than the full amount due and still satisfy your debt (be sure to get all agreements and transactions in writing though). Your credit report will no longer indicate a delinquent payment and collection calls and legal action may be stopped as a result. But in many cases, your credit report might show a settled debt rather than one paid in full which can have a significant impact on your credit report. This forgiven debt will then be reported to the IRS as taxable income. In the event that you have not recorded the details of your agreement/negotiation in writing, it is possible for the collection agency to still sell your debt to another agency and show your status as delinquent. Debt settlement agencies can often charge substantial fees. These could be up front or taken from your final settlement to your creditors, ultimately leaving you with less savings than you anticipated.


Declaring bankruptcy is never an easy choice to make. It can have long term consequences on your credit, your self-image and even your relationships. On the other hand, it may reduce your stress and anxiety in relation to your mounting debts and prevent you from losing your assets. Often regarded as a last resort, this is one debt management process that cannot be taken lightly.

Declaring bankruptcy should only be done after weighing all the pros and cons, under professional guidance and only when it is the last choice left.

By definition, bankruptcy is declared when a person is not able to pay off his or her debts (and has proven that it is impossible to do so). All liabilities are settled legally in full or in part. This allows the creditors to receive a fair share of what is owed to them as well as give the debtor a fresh start to his/her financial obligations.

Some reasons for considering bankruptcy:

  • You do not have enough to live on after all your monthly payments to your creditors are made.
  • You are in a low income bracket or are on Social Security.
  • You do not have any other assets that can be sold to pay off your loans/debt.
  • You are willing to live for seven to ten years with restricted access to credit.

There can be a stigma attached to the concept of declaring bankruptcy but it can also have a positive effect on your financial burden, if chosen. These may include:

  • Bankruptcy “discharges” many of your debts implying that there is no longer any legal obligation to pay your debts.
  • It halts the collection process. No more collection calls and notices.
  • If your utilities have been cut off, they will be restored after declaring bankruptcy or it can prevent them from being cut off.
  • The foreclosure process can be halted, giving you the much needed time to make your repayments.

There are many legalities involved and things to take into consideration when declaring bankruptcy. This is not a decision to be made without the aid of a competent lawyer. And while care should be taken, it should also not be disregarded as an option because of fear or embarrassment.

The disadvantages of declaring bankruptcy need to be studied and thought through before making any final decision. These include:

  • Having your personal finances carefully scrutinized.
  • Being subjected to a Bankruptcy Restriction Order (BRO) if you are proven to have behaved recklessly (gambling, speculation or unwarranted spending). You could be held accountable for such offenses for up to fifteen years.
  • If your home can be sold to offset the payments due, the Official Receiver will expedite the sale so that the proceeds are distributed among your creditors.
  • There are some debts that cannot be written off such as taxes due to the IRS, child support and student loans.
  • If you have a profession in finance, law, government or law enforcement, you may lose your job or find it difficult to find employment in the future.

If you are sinking in debt and feel there is no way out, bankruptcy can help you achieve financial stability again, but there are a number of sacrifices you have to be willing to make. The impact of bankruptcy must be clearly understood and a choice has to be made.

As you can see, there are various alternatives available to dealing with debt. With choices including budgeting, debt settlement, debt management plans, credit counseling, and finally bankruptcy, there are pros and cons associated with each. It is imperative that you fully understand your individual financial situation and commit yourself to changing your habits regarding spending and saving. Faced with the possibility of foreclosure, repossession, and losing everything that you value, it is important to make that first step on the path to financial recovery as soon as possible. With a lot of determination, sacrifice, and commitment, you can experience lasting changes.

In This Chapter You Learned:

  • What signs to look for that indicate you’re sliding into financial distress.
  • What steps to take to get your financial life back on track

The pros and cons of options such as debt settlement, debt management, self-administration and bankruptcy as solutions to your money management debt problems.

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